Wednesday, June 14, 2006

Don't tell anyone, but a dirty little secret within the foreign aid world is that aid often doesn't work very well.

I disagree with many of Professor Easterly's arguments, but he's right about one central reality: helping people can be much harder than it looks. When people are chronically hungry, for example, shipping in food can actually make things worse, because the imported food lowers prices and thus discourages farmers from planting in the next season.

It's well-known that the countries that have succeeded best in lifting people out of poverty (China, Singapore, Malaysia) have received minimal aid, while many that have been flooded with aid (Niger, Togo, Zambia) have ended up poorer.

Saddest of all, Raghuram Rajan and Arvind Subramanian of the International Monetary Fund have found that "aid inflows have systematic adverse effects on a country's competitiveness." One problem is that aid pushes up the local exchange rate, discouraging local manufacturing. Mr. Subramanian also argues that aid income can create the same kinds of problems as oil income — that famous "oil curse" — by breeding dependency and undermining local institutions.

I have written often of the oil curse and how it causes governments to tap oil wells rather than tap the potential of their people. It is concerning to me if foreign aid causes a similar problem where governments decide that it is easier to get funding from foreign aid than from taxes. To get more money from taxes, you have to build up your economy which requires good growth policies, honest government and good education. If the governments can get the foreign aid without having to undertake these difficult issues, that is a concern. Tricky problem to find a way to give the aid without it causing other problems that retard economic growth and independence.